Employee Benefit Trust

Member Expo

It was great seeing so many of you at Member Expo in Chelan! We hope you had a productive time learning to maximize your program benefits and networking with our staff and your peers across the state. After the Health Care Legal Update session, our legal counsel researched two outstanding questions that are answered below.

An employee has coverage outside of the Trust and the employer is contributing to a HRA on behalf of the employee and their family. The employee and family use their HRA. How is this reportable or allowable in 2017?

As discussed immediately below, this scenario is allowable. The employer would report the HRA coverage on a 1095-C as self-funded minimum essential coverage, listing the employee and each dependent as covered individuals under Part III of the form.

The Treasury regulations provide that the HRA and the “other group health plan” with which it is integrated to comply with the Affordable Care Act could each be sponsored by different employers. Thus, as a general matter, an employee may enroll in a member employer’s HRA but choose to enroll their entire family (including themselves) in a group health plan provided by another employer (such as their spouse’s employer).

This general rule seemed to be called into question by IRS Notice 2015-87, which stated in Q&A-4 that an employee enrolled in employee-only coverage plus HRA sponsored by their employer could not use the HRA to reimburse medical expenses incurred by a spouse or dependent who was not enrolled in the HRA-sponsoring employer’s group health plan. However, the Notice refers to the Treasury regulations for determining when a HRA is integrated with the “other group health plan” – and these regulations continue to permit integration with a plan sponsored by a different employer. Additionally, in March 2016, IRS officials informally confirmed that, notwithstanding its apparently more restrictive language, Notice 2015-87 did not change the general rule permitting an employer to integrate its HRA with another employer’s group health plan to comply with the ACA.

The takeaway is that the “family unit” needs to remain together and covered under the “other group health plan” for it to be integrated with the HRA. Thus, for an employer’s HRA to be considered integrated when it reimburses expenses incurred by an employee’s family members, the employee and those family members must be covered as a whole under either the employer’s “other group health plan” or another employer’s “other group health plan.” Integration is at risk if the employee has employee-only coverage under the employer’s “other group health plan” but tries to use the employer’s HRA to reimburse expenses for a family member who is covered under a different employer's plan.

The employer covers all employees on medical coverage, but allows an “opt out” payment for dependents that are not enrolled, who are enrolled in other coverage elsewhere. Is there any legal problem in allowing this opt out payment for dependents that do not enroll?

Whether an applicable large employer’s coverage offered under pay-or-play is affordable depends on the “employee required contribution” amount, which is a legal term referring to the employee’s annual cost for employee-only coverage. As such, the proposed opt-out rules, which provide how opt-out payments impact affordability, primarily apply to payments for an employee to decline to enroll in any coverage offered by the employer. In light of this, it is not surprising that IRS guidance to date has failed to explicitly address an opt-out payment to an employee to decline to enroll the employee’s otherwise eligible dependents in family coverage (even if the employee enrolls in an employee-only option). In its preamble to the proposed rules, the IRS invited comments on other types of opt-out arrangements that should be addressed, so this might be clarified in future guidance. However, even if such an arrangement could be treated as increasing the employee’s cost for family coverage, this is unlikely to impact the employer’s affordability calculation under pay-or-play, which looks to the employee’s cost for employee-only coverage.

One thing to consider, however, is whether the employer could satisfy its pay-or-play obligation to offer coverage to a full-time employee’s dependent children if it makes an opt-out payment for the employee to not enroll them. Unfortunately, this also is not specifically addressed in IRS guidance to date, although the 2016 Instructions for Forms 1094-C & 1095-C provide that an employer cannot treat a “conditional offer of coverage” to an employee’s dependent child as an “offer” on Form 1095-C unless the employer knows that the child met the condition to be eligible for coverage. It is not clear whether the IRS would consider an opt-out payment for not enrolling a dependent like a conditional offer of coverage, and we hope the IRS will issue clarifying guidance in this regard. In the meantime, an employer with such an opt-out arrangement should consult with counsel to determine whether this could impact its pay-or-play obligation for dependent coverage.

Please note that these responses provide general information about the application of relevant law and other guidance but do not constitute legal advice. If a member has specific questions about their employer’s benefit arrangement or wellness activities, you should consult with your employer’s legal counsel.